UNIVERSITY OF MUMBAI LAW ACADEMY

TO : PROF. SMRUTI SALUNKE

FROM : NIDHI HASMUKH FAGANIYA

ROLL NO : 12

FOURTH YEAR. BBA LLB (HONS)

SUBJECT : BANKRUPTCY AND INSOLVENCY

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 INDEX

Sr. No Particulars Page.no

1 Introduction 3
2 Who Can Initiate Insolvency Resolution Process 4
3 Financial Creditor 5–7

4 Operational Creditor 8– 11

5 Suspension Of Initiation Of Corporate Insolvency 12 – 14

Resolution Process

6 Bibliography 15

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 INTRODUCTION

Indian legal system incorporated legislation distinctly dealing with insolvency and
bankruptcy in 2016. Up until then, matters pertaining to insolvency and bankruptcy were
largely covered in varying codifications laying down laws corresponding to the specified
code’s requirement. For instance, inter alia, Companies Act, 2013, laid down provisions
pertaining to winding up of companies, SARFAESI Act, 2002, provided for discharge of
liability by the bank towards a secured creditor for their secured interest regarding the failure
of payment and Banks and Financial Institutions Act, 1993, presented rules for financial debt
recovery.

In light of the losses sustained by the creditors, in consequence to the non-payment of debt in
due course of time because of non-existence of a legally binding procedure, the parliament
introduced the Insolvency and Bankruptcy Bill in 2015 which passed in 2016. The losses
borne by the creditors were by extension affecting the financial stability of the creditors as
well as the economy.

The Indian Insolvency & Bankruptcy Code provides for legally binding and
sustainable modus operandi for the insolvency process of corporates, partnerships and
individuals. This guide deals specifically with the Corporate Insolvency Resolution Process”.
Section 6 under Chapter II of The Code defines CIRP as a process initiated by a financial
creditor, operational debtor or the corporate debtor itself when a payment by the corporate
debtor has defaulted.

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 WHO CAN INITIATE INSOLVENCY RESOLUTION PROCESS

Section 6: Persons who may initiate corporate insolvency resolution process.

Where any corporate debtor commits a default, a financial creditor, an operational creditor or
the corporate debtor itself may initiate corporate insolvency resolution process in respect of
such corporate debtor in the manner as provided under this Chapter (Chapter II of part II).

“Default” is defined in section 3(12) of the IBC as non-payment of a debt when the whole or
any part or installment of the amount of debt has become due and payable, and is not paid by
the debtor or the CD, as the case may be.

Section 4 of the IBC provides that Part II of the IBC (which deals with the CIRP and
liquidations) shall apply to matters relating to the insolvency and liquidation of CDs where
the minimum amount of the default is Rs. 1,00,000. The Central Government may, by
notification, specify a higher minimum amount, but it shall not be more than 1 Crore.
Recognizing the stress faced by companies as a result of COVID-19, the Central Government
passed a notification on March 24, 2020, increasing the threshold of default to 1 Crore.

Essar Projects India Ltd. V. MCL Global Steel Pvt. Ltd 1

Section 5(6) read with Section 8 of the IBC reveals that the Corporate Debtor needs to prove
that the ‘dispute’ is in existence either by way of suit in court of law or arbitration. A mere
mentioning that the ‘dispute’ is in existence in relation to a debt is not sufficient.

1
Company Appeal (AT) (Insolvency) No. 29 of 2017

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 FINANCIAL CREDITOR

Section 7(1) of the IBC states that an Financial Creditor (herein after referred as FC), either
by itself or jointly with other FCs, or any other person on behalf of the FC, as may be notified
by the Central Government, may file an application for initiating a Corporate Insolvency
Resolution Process (herein after referred as CIRP) against a Corporate Debtor (herein after
referred as CD) before the Adjudicating Authority (herein after referred as AA) when a
default has occurred in payment of financial debt by the CD. For the purpose of section 7(1),
a default includes a default on a financial debt owed not only to the applicant FC but to any
other FC of the CD. An FC is defined under section 5(7) of the IBC as any person to whom a
financial debt is owed (and includes a legal assignee/transferee).

A ‘financial debt’ is defined in section 5(8) as a debt along with interest, if any, which is
disbursed against the consideration for the time value of money and includes:
(a) money borrowed against the payment of interest;
(b) any amount raised by acceptance under any acceptance credit facility or its de-
materialized equivalent;
(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes,
debentures, loan stock, or any similar instrument;
(d) the amount of any liability in respect of any lease or hire-purchase contract which is
deemed as a finance or capital lease under the Indian Accounting Standards or such other
accounting standards as may be prescribed;
(e) receivables sold or discounted other than any receivables sold on a non-recourse basis;
(f) any amount raised under any other transaction, including any forward sale or purchase
agreement, having the commercial effect of a borrowing. The explanation to this
provision provides that any amount raised from an allottee under a real estate project
shall be deemed to be an amount having the commercial effect of a borrowing and that
the expressions “allottee” and “real estate project” shall have the meanings respectively
assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and
Development) Act, 2016;
(g) any derivative transaction undertaken in connection with protection against or benefit
from fluctuation in any rate or price. To calculate the value of the derivative transaction,
only the market value of such transaction shall be considered;

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(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond,

documentary letter of credit, or any other instrument issued by a bank or financial
institution;
(i) the amount of liability in respect of any of the guarantees or indemnities for any of the
items referred to in sub clauses (a) to (h) above.

An FC can be secured or unsecured. The IBC does not make a distinction between secured
and unsecured FCs for the purpose of initiating a CIRP of a CD. Multiple FCs may file an
application to initiate a CIRP jointly. Further, since a default for the purpose of section 7
includes a default in respect of a financial debt owed not only to the applicant FC but to any
other FC of the CD, if a loan was given to a CD by a consortium of banks, and if there is a
default in repaying the loan, any member of the consortium may seek initiation of a CIRP of
the CD as an FC.

In Laxmi Pat Surana Vs. Union of India and Another 2, the NCLAT held that a financial debt
includes a debt owed to a creditor by a principal and guarantor. An omission or failure to pay
the debt by the guarantor, when the principal sum is claimed, comes within the scope of
default under section 3(12). Therefore, a CIRP can be initiated by an FC who had taken
guarantee for the debt against the guarantor for failure to repay the money taken by the
principal borrower.

2
Civil Appeal No. 2734 Of 2020

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An FC has to apply to initiate a CIRP against a CD under section 7 of the IBC, using Form 1
as provided for in the Application to AA Rules. This should be accompanied by the
documents and records required by, and specified in, the Application to AA Rules.As per
section 7(3) of the IBC, the FC shall, along with the application, furnish:
(a) a record of the default recorded with the IU or such other evidence of default as may be
specified;
(b) the name of the IP proposed to act as an IRP; and
(c) any other information as may be specified by the IBBI.

Section 7 of the Code, which deals with the procedure for filing and admission of an
insolvency application by a financial creditor, provides that where the NCLT is satisfied that
a default has occurred, the application is complete, and there is no disciplinary proceeding
pending against the proposed resolution professional, it may admit such application.

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 OPERATIONAL CREDITOR

An OC is defined under section 5(20) of the IBC as any person to whom an operational debt
is owed (and includes a legal assignee/transferee).
An “operational debt” is defined in section 5(21) as a claim in respect of the provision/supply
of goods or services to the CD including employment or a debt in respect of payment of dues
arising under any applicable law and payable to the Central Government, any State
Government or any local authority. An operational creditor is defined under Section 5(20) of
the Insolvency and Bankruptcy Code(hereinafter the IBC) to mean “any person to whom an
operational debt is owed and includes any person to whom such debt has been legally
assigned or transferred”, and is owed an operational debt which is defined under section
5(21) of the IBC to mean: “a claim in respect of the provisions of goods or services including
employment or a debt in respect of the repayment of dues arising under any law for the time
being in force and payable to the Central Government, any State Government or any local
authority”.
An application to initiate a CIRP against a CD may be filed by an OC under section 9 of the
IBC. However, before filing the application, the OC must serve a demand notice on the CD
under section 8 of the IBC.

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 Application under Section 8 & 9

Under Section 8(1) IBC, an operational creditor may, on the occurrence of a default, deliver a
demand notice of unpaid operational debtor copy of an invoice demanding payment of the
amount involved in the default to the corporate debtor in such form and manner as may be
prescribed.

Section 8(2) of the IBC states that an OC may, on the occurrence of a default, deliver a
demand notice of unpaid operational debt or copy of an invoice demanding payment of the
default amount to the CD in such form and manner as may be prescribed. For the purposes of
the IBC, a demand notice is either a notice or a copy of an invoice (both in the prescribed
form) that should be served by an OC on the CD, demanding payment of unpaid operational
debt, prior to the initiation of a CIRP against the CD.

The notice must be on Form 3, while the invoice demanding payment must be on Form 4,
appended to the Application to AA Rules. Broadly, Form 3 requires the details of operational
debt, including the amount of debt, details of the relevant transactions and the date it fell due,
the details of default including the amount in default, the date of occurrence of default and
the workings of computation of default and date of default, the details of the security and
retention of title arrangements (if any), the records and evidence of debt and default, and
relevant provisions debt fell due.

Rule 5 of the Application to AA Rules states that the demand notice must be delivered to the
CD:
(a) at the registered office of the CD by hand, registered post, or speed post with
acknowledgement due, or
(b) by electronic mail service to a whole time director or designated partner or key
managerial personnel, if any, of the CD. A copy of the demand notice served by an OC
should also be filed with an IU, if any. At the time of publication, there is only one IU, so
this is not often done.

Section 8(2) of the IBC states that the CD shall, within 10 days of receiving the demand
notice, bring to the notice of the OC:

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(a) the existence of any dispute or record of the pendency of a suit or arbitration proceedings
filed before receiving the notice or invoice relating to the dispute;
(b) evidence that the unpaid operational debt has been settled—by sending an attested copy
of the record of electronic transfer of the unpaid amount from the bank account of the
CD; or by sending an attested copy of the record that the OC has cashed a cheque issued
by the CD.
If no payment has been received after the expiry of the 10-day period, the OC may file an
application before the AA to initiate a CIRP.

Further, the Act states under Section 9(1), after the expiry of the period of ten days from the
date of delivery of the notice or invoice demanding payment under sub-section (1) of section
8, if the operational creditor does not receive payment from the corporate debtor or notice of
the dispute under subsection (2) of section 8, the operational creditor may file an application
before the Adjudicating Authority for initiating a corporate insolvency resolution process.

Upon acceptance of an application, the adjudicating authority shall initiate a corporate

insolvency resolution process (CIRP), under Section 10 and shall thus proceed to appoint an
Interim Resolution Professional under section 16 of the said Act.

The CIRP must be completed within 180 days of from date of admission of application and
the Adjudicating Authority, if it finds reasons may extend this time, to not more than 90 days
(upper limit is 330 days).

J.K. Jute Mills Company Limited V. M/s. Surendra Trading Company 3

In this case, it has been observed that the procedural part of Section 7 / Section 9 / Section 10
are directory in nature. The Code broadly prescribes four timelines in respect of CIRP:
(a) 14 days for the AA to admit or reject an application for initiation of CIRP;
(b) 7 days for an applicant to rectify defects in the application for CIRP;
(c) 30 days for the Interim Resolution Professional to discharge his duties; and
(d) 180 days for creditors to complete a CIRP.

It held that timelines of 14 and 30 days are directory in nature, while those of 7 and 180 days
(180 + 90 = 270 days) are mandatory under the Code.

3
Civil Appeal No. 8400 of 2017

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In Mobilox Innovations Pvt. Ltd. Vs. Kirusa Software Pvt. Limited 4, the Supreme Court
undertook a detailed analysis of the provisions relating to applications by an OC under
section 9 of the IBC and laid down the following principles:
When examining an application under section 9 of the IBC, the NCLT will have to
determine:
i. whether there is an operational debt exceeding Rs 100,000;
ii. whether the documentary evidence furnished with the application demonstrates
that the debt is due and has not yet been paid;
iii. whether there are any disputes between the parties over the debt, or a record of
pendency of any suit or arbitration proceeding filed before the receipt of the
demand notice in relation to the dispute.
iv. If any of the above conditions are not satisfied, the OC’s application will be
rejected by the AA

4
(2018) 1 SCC 353

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 SUSPENSION OF INITIATION OF CORPORATE INSOLVENCY

RESOLUTION PROCESS

The Government of India (GoI) imposed an absolute lockdown due to the pandemic on
March 24, 2020, which was extended multiple times. This lockdown wreaked havoc over the
economic vein of the country and the GoI, in order to mitigate the impact, enforced certain
pertinent measures. With an intent to reduce the impact on businesses, the GoI not only
increased the threshold of initiating corporate insolvency resolution proceedings from INR
One Lakh to INR One Crore and it also suspended initiation of insolvency proceedings
pursuant to Sections 7, 9 and 10 the Insolvency & Bankruptcy Code, 2016 (IBC). The GoI
mandated the incorporation of Section 10A in the IBC on June 5, 2020 by way of an
ordinance1 (Ordinance), which reads as follows:
“Section 10A: Notwithstanding anything contained in sections 7, 9 and 10, no application for
initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for
any default arising on or after 25th March, 2020 for a period of six months or such further
period, not exceeding one year from such date, as may be notified in this behalf:

Provided that no application shall ever be filed for initiation of corporate insolvency
resolution process of a corporate debtor for the said default occurring during the said
period. Explanation.—For the removal of doubts, it is hereby clarified that the provisions of
this section shall not apply to any default committed under the said sections before 25th
March, 2020.”

The above Section retrospectively provided a bail out to the business sector and allayed the
apprehensions of insolvency proceedings in an unprecedented period wherein the economy
collapsed, and the world came to a standstill. It is noteworthy that the Rajya Sabha on
September 19, 2020 passed the Insolvency and Bankruptcy Code (Second Amendment) Bill,
2020 (Bill), which ensures that fresh insolvency proceedings will not be initiated against a
company starting March 25, 2020. The period was for six months pursuant to the Ordinance
and the amendment empowered the GoI to extend this suspension for a maximum period of
one year. Expectedly, the operation of Section 10A of IBC was extended for three months,
upon the expiry of statutory period of six months in September 2020, till December 2020 and

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for further three months in December 2020, till March 2021, thereby enforcing the
suspension of Sections 7, 9 and 10 of IBC for one whole year.

The intent of the GoI was to safeguard the interests of the distressed businesses and protect
them from the ghost of insolvency at a time when the businesses across all the spectrums
succumbed to the Covid-19 pandemic.

According to Section 10 of the IBC, the corporate debtor has the option and power to
voluntarily file for insolvency proceedings. The suspension of the provision defeats the
purpose of the IBC by depriving the corporate debtor of the right to initiate voluntary
insolvency proceedings. Thus, it gives no other option to the distressed businesses, especially
the ones who wish to avail the benefit of the IBC. Moreover, this is antithetical to the
observation made by the Hon'ble Supreme Court of India in Swiss Ribbons Pvt. Ltd. v. Union
of India 5 wherein it was held that “The primary focus of the legislation is to ensure revival
and continuation of the corporate debtor by protecting the corporate debtor from its own
management and from a corporate death by liquidation”.

Recently, the Hon'ble Apex Court, in Ramesh Kymal v. M/s Siemens Gamesa Renewable
Power Pvt. Ltd 6, has clarified that section 10A of IBC bars initiation of CIRP against the
debts accrued between March 25, 2020 to the date of enactment of the Ordinance i.e., June 5,
2020, even if an application under sections 7, 9 or 10 of IBC was already filed during the
period of March 25, 2020 to June 5, 2020.

5
Swiss Ribbons Pvt. Ltd. v. Union of India, 2019 SCC Online SC 73
6
Civil Appeal 4050 of 2020

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 Legal Challenge

The validity of Section 10A of the IBC was challenged before the Delhi High Court, seeking
declaration that the suspension of Section 10 of The Insolvency and Bankruptcy Code,
(Amendment) Ordinance, 2020 as ultra vires Articles 14 and19(1)(g) of the Constitution of
India. However, as the ordinance was transposed into an Act with effect from September 23,
2020, the Public Interest Litigation was deemed to be infructuous and hence withdrawn by
the Petitioner 7.

Another challenge to the legal validity of Section 10A of the IBC has been made before the
Delhi High Court on the ground that it discriminates against persons and personal guarantors,
as while the provision suspends the enforcement of sections 7, 9 and 10 of the IBC against
corporate debtors, it excludes persons and personal guarantors from its ambit 8.

 Alternate remedies

With suspension of IBC, the creditors would have to return to the archaic remedies such as
Section 19 of Recovery of Debts due to Bank and Financial Institution Act,1993; Section 13
and Section 14 of the Securitization and Reconstruction of Financial Assets and Enforcement
of Securities Interest Act, 2002. In addition, creditors can look upon remedies under the
Commercial Courts Act, 2015 & Code of Civil Procedure for recovery of dues.

7
Rajeev Suri v. Union of India - W.P.(C) 4622/2020
8
Getamber Anand v. Union of India – W.P. (C) 8868/2020

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 BIBLIOGRAPHY

i. Insolvency & Bankruptcy Act

ii. Insolvency & Bankruptcy Code

iii. https://main.sci.gov.in/supremecourt/2020/27296/27296_2020_36_1501_26013_Judgement
_09-Feb-2021.pdf

iv. http://delhihighcourt.nic.in/dhcqrydisp_o.asp?pn=207162&yr=2020

v. http://delhihighcourt.nic.in/dhcqrydisp_o.asp?pn=9960&yr=2021

vi. https://www.ibbi.gov.in/uploads/whatsnew/e42fddce80e99d28b683a7e21c81110e.pdf

vii. https://www.ibbi.gov.in/uploads/legalframwork/741059f0d8777f311ec76332ced1e9cf.pdf

viii. http://www.mca.gov.in/Ministry/pdf/Notification_04012021.pdf

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